Carbon tax is coming …

Carbon tax will soon become a reality, although there is still not much clarity on how it will be implemented.

However, it is now certain that it will take place, with Financial Minister Pravin Gordhan announcing in his recent budget that the tax will come into effect in 2014.

So much for the bad news: the good news is that the impact of the tax will be significantly less than originally anticipated. In the 2012 budget speech, carbon tax was proposed on a percentage-basis, below which tax will not be payable. This is in preference to paying tax on an absolute carbon emission threshold.

The minister also announced a higher tax-free threshold, benefitting businesses with process emissions. Consideration will be given to the limitations of the cement, iron and steel, aluminium and glass sectors to mitigate emissions over the near-term.

But Robbie Louw, a director of Promethium carbon, a carbon advisory firm, has concerns.

“For Scope 3 emissions, meaning indirect emissions from a company’s supply chain, suppliers will most probably try to pass on the effect of the carbon tax to customers.

“Customers in turn will oppose any attempts by a company to pass on its carbon costs. It is therefore important for businesses to understand the implications of their Scope 3 emissions,” he says.

Louw points out that the essence of the carbon tax means that from 1 January 2015 to 2020 there will be a basic tax-free threshold of 60%. The offset will be 5% to 10% for emission-intensive and trade-exposed industries.

The carbon tax rate will be R120 per tonne of CO2 increasing at 10% per year. There will be an updated policy paper by the end of March 2013 and an energy-efficiency tax incentive.

Carbon tax will therefore be R120 per tonne on 40% of emissions. This equates to R48 per tonne on the overall emissions (120 x 0,40 = 48,0). There are provisions in government’s budget announcements to offset part of these emissions.

For example, if a company offsets 10% of its total emissions (this is at R120 per tonne) it means that the overall tax liability comes down by R12 (120 x 0,10 = 12) giving a tax liability of R36 per tonne of CO2 emissions (R48 – R12 = R36).

The company will therefore stop paying the non-renewable levy at R35 and start paying the carbon tax at R36 – which are almost the same.

This takes care of the carbon tax on electricity, but the tax remains on other emissions, such as on diesel and the burning of coal. These emissions could still cost a company dearly, but special provisions are being built into the tax structure for these process emissions.

Revenues generated through the carbon tax will be recycled to fund an energy-efficiency savings tax incentive, and there will be a phasing out of the electricity levy as the carbon tax is phased in.

The non-renewable electricity levy is currently 3,5 cents per kWh. This equates to R35 per tonne of CO2 emissions which will be phased out when carbon tax is introduced.

“The latest announcement therefore achieves the object set out in the National Development Plan for the carbon tax to focus on minimising the impact on issues such as employment,” says Louw.

At the recent Champions of the Environment Foundation (CeF) conference on carbon emissions, the National Treasury shared some of the thinking behind the levying of the carbon tax.

In a supplied document, it stated that climate change is a serious global challenge that requires a concerted international response and national efforts to reduce excessive greenhouse gas (GHG) emissions.

Treasury believes there is an economic rationale for a carbon price.

Not only would companies with low abatement costs have an incentive to undertake further measures to avoid paying the tax, firms with high marginal abatement costs will tend to do less.

In addition, the environment is essentially a “public good”, it argues and so climate change and other negative effects of GHG emissions are paid for by the public. A tax could help to ensure that the emitter pays at least a portion of the costs.

This means that a carbon price could help to internalise a negative externality – because the external costs are integrated into the producers’ costs and consumer prices, creating incentives for changes in behaviour and the development of greener technologies, such as renewable energy, energy efficiency technologies, carbon capture and storage.

Treasury therefore believes that a tax set at an appropriate level and phased in over time would provide a strong price signal to both producers and consumers to change their behaviour over the medium- to long term.

Treasury also touched on the sensitive issue of revenue recycling in the form of tax shifting and earmarking. It believes that neither public finance theory nor good public finance practice support the full earmarking of specific revenue streams.

One reason for this is the risk of misallocation of public funds depending on the amount of money collected from a specific tax, with too much or too little funding going to a target area.

In addition, earmarking might impose undue constraints on government in a way that serves special interest groups, and the state should not allow special interests to capture public resources.

However, Treasury concedes that on-budget allocations, or the “soft”-earmarking of some revenues for specific (such as environmental or social) purposes, may be appropriate to promote public and political acceptance of the reform. Such arrangements should not undermine the normal budgetary process.

Some form of revenue recycling through tax shifting could be considered, it states.

Other options have been explored for reducing GHG emissions, Treasury states, but it determined that a carbon tax holds the most advantages, including:

* Participation and oversight of the tax by the existing revenue administration authority;

* Involving fewer players and therefore incurs lower costs;

* Minimising the opportunity for abuse and risk within the system, as it follows a much simpler structure; and

* Creating less of an administrative burden associated with creating an entirely new accounting scheme for carbon allowances.